Alcoa 2004 Annual Report Download - page 3

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Last year I wrote about how
Alcoa’s Vision of aspiring to be
the best company in the world
is about delivering sustained financial
performance, while building for the
future and delivering on all of Alcoa’s
seven Values. This is the goal that
all 131,000 Alcoans across the globe
are striving for every day.
In 2004 – facing the headwinds
of rising costs and currency challenges –
Alcoans delivered the highest annual
revenue and the second-highest prof-
itability in the Company’s history. Strong
cash flows allowed us to not only reduce
debt by approximately $2 billion over
the last two years, but also to invest in
numerous growth projects around the
world for the Company’s future. And we
did all of this while we continued to live
the Values that are the core
of our Company, achiev-
ing, for example, a Lost
Workday rate of 0.09
for the first time, while
improving our Total
Recordable Rate for the
18th year in a row.
2004 Financial Results
Our 2004 financial results included:
•Income from continuing operations
of $1.4 billion, a 33% increase vs.
2003, and our second straight year of
double-digit earnings growth;
•Revenue of $23.5 billion, an 11%
increase vs. 2003;
• A debt-to-capital ratio decline
to 30.0%, the lowest in five years;
•Disciplined use of capital to fuel
growth projects. 2004 capital spending
was $1.1 billion, or 95% of deprecia-
tion, with approximately one-third
used on growth initiatives. In 2005,
we expect to invest approximately
$2.5 billion on capital projects,
with nearly two-thirds dedicated
to growth projects; and
•Improving the Company’s return on
capital (ROC) to 8.4%, up 140 basis
points from last year.
Fellow Shareowners:
Alain Belda, Chairman and Chief Executive Officer
Afavorable external business
environment contributed to our per-
formance. The global economy grew
at its fastest pace (+4.4%) in the last
two decades. Aluminum consumption
increased by almost 9%, and aluminum
prices were up 21%. Several of our
key markets – notably aerospace and
commercial vehicles – moved to a
cyclical upturn after declining trends
over the past two to three years.
However, these favorable trends
were countered by a weakening
U.S. dollar and significant cost issues,
notably energy and input costs such
as resins, carbon-based materials, and
alloy materials. Currency and energy
alone in 2004 negatively impacted our
earnings by more than $300 million
compared to 2003.
As strong as our 2004 financial
results were, we areconfident we can
do better. The ultimate measure of
success is growth in shareholder value
during the year and over a period. Our
2004 return was –15.7%, obviously a
disappointment. However, the combined
2003/04 return is +44% compared to
+31% for the S&P 500.
Stock performance is a mix of past
performance, future expectations, and
shareholder options. The best answer to
improved shareowner returns is consis-
tent, transparent, and improved perfor-
mance. And this is what our plans areall
about. We remain committed to our key
financial goals:
•Profitable Growth – Continuing the
drive to profitably grow revenues
as well as to join the first quintile of the
S&P Industrials, measured in terms of
ROC; and
•Cost Savings – Achieving $1.2 billion
in cost savings by 2006. In 2005, this
cost-savings initiative – our third three-
year program since 1998 – will be
used to help offset cost increases across
the business and bolster profitability.
On our ROC goal, we again
improved this year, but we have more
work to do. Our 2004 ROC was
8.4%, which improved from 7.0% a
year ago. However, the first quintile
entrypoint is currently 18.5%, so we
will continue to work to profitably
grow and improve our results.
Our cost-savings program, as
previously mentioned, was held back
by rising costs in 2004.
We expect this to contin-
ue to be a challenge in
2005. We project approx-
imately $600 million in
cost increases from ener-
gy, labor, raw materials,
and currencies. Our
cost-savings plans for 2005 indicate
we will be able to offset most, if not all,
of these increases. But this will require
substantial effortin planning, focusing
effort, and execution at all levels of
the organization and across our global
businesses, which is why our structure
and culture are so vital.
Building for the Future
We have taken many steps to position
and align your Company to capture
growth opportunities and expand –
both through new geographies as well
as expanding current assets.
In late 2004, we realigned the
Company along six global platforms to
better serve customers and increase the
ability to capture efficiencies. We also
centralized purchasing on a global basis
to improve our costs and better use our
leverage. As we moved to strengthen the
global business structures, we also creat-
ed strong regional leadership to ensure
that we maintain optimum relationships.
In 2004 – facing the headwinds of rising costs and
currency challenges – Alcoans delivered
the highest annual revenue and the second-highest
profitability in the Company’s history.